The insurance fund will act as an additional margin of safety behind USDe to provide a source of capital to pay for periods of negative funding, as well as a bidder of last resort on USDe in open markets.
Composition of Insurance Fund
Stable uncorrelated collateral to cover funding payments in same currency denomination:
Stablecoin collateral including USDC and USDT for USD-M contracts
Smaller stETH collateral allocation for ETH-M contracts
USDe and USD Liquidity Provider positions
Security of Insurance Funds
Controlled by 7/12 multi-sig with keys held by contributors sitting both within and outside of Ethena Labs, with insufficient keys held by Ethena Labs to unilaterally execute transactions.
USDe Open Market Arbitrage Vehicle
Since the solvency of USDe is both transparent and provable during all periods of time, if the open market price of USDe divergences sufficiently from the provable collateral value backing USDe then the insurance fund will act as a bidder of USDe in the open market.
The profits of this potential arbitrage will be socialized with all governance holders of Ethena.
Capitalization of Insurance Fund
For the duration of the shard campaign the insurance fund will be funded by a portion of the yield generated by the Protocol asset backing which relates to the proportion of USDe that is not staked.
The insurance fund will also be capitalized with funds raised from investors, and longer-term a take-rate will be applied to the yield generated, which will be redirected to the insurance fund to grow alongside the outstanding balance of USDe.
We have conducted detailed modelling on the proposed sizing of the insurance fund under various stressed scenarios to inform the ongoing capitalization of the reserve